Even after paring its schedule, Gol filled only 64.9 percent of available domestic seats in February, a peak summer travel period because of Carnival. Latam Airlines Group SA’s Tam unit, Sao Paulo-based Gol’s biggest rival in Brazil, had a load factor of 75.1 percent.

More cuts may be coming as Gol works to end losses that sent the shares to a 3.6 percent 12-month drop, the third-worst showing among 19 peers in the Americas, based on data compiled by Bloomberg. Travel demand waned when Brazil’s economy slowed in 2012, and new entrants such as Panama’s Avianca Taca Holding SA are expanding in Latin America’s largest airline market.

“Results should improve, but we still assume losses in 2013,” said Duane Pfennigwerth, an analyst at Evercore Partners Inc. in New York. “They’ve been active in reducing capacity in the domestic market, which we view positively. However, we have not yet seen these cuts drive profit improvement.”

At minus 28 percent, Gol’s one-year return on equity is the lowest among 19 peers in the Americas, according to data compiled by Bloomberg. Gol is poised to post a sixth loss in seven quarters on March 25, according to analysts surveyed by Bloomberg.

Analysts’ ratings

The shares rose 3.3 percent yesterday to 14.30 reais in Sao Paulo. Of nine analysts in a Bloomberg survey, six recommend buying the stock, two rate it as a hold and one says sell. Marcus de Barros Pinto, a spokesman, declined to discuss Gol’s strategy ahead of the earnings release.

Gol shrank 2012 domestic capacity by 5.4 percent and has said seating would fall as much as 8 percent in 2013’s first half. Chief Executive Officer Paulo Kakinoff also has returned older jets to lessors and chopped jobs since succeeding founder Constantino de Oliveira Jr., who is now chairman, in July.

February traffic results disclosed yesterday probably will extend Gol’s January distinction of having the least-full planes once Brazil’s airline association, known as Abear, reports final figures. Gol’s rate fell 0.9 percentage point last month from a year earlier, while Tam’s jumped 10.5 points.

Market share

Competitors such as Panama City-based Avianca are nibbling at Gol’s standing as No. 2 in Brazil by domestic fliers after Tam, the local carrier acquired last year by Santiago-based Lan Airlines SA. Tam’s January market share of 42.5 percent slid from 43.4 percent two years earlier, while Gol’s fell to 34.3 percent from 37.3 percent. Avianca’s share rose to 6.3 percent from 2.5 percent, according to the Brazilian aviation regulator, known as Anac.

“Avianca is taking market share from a lot of people,” said Pedro Galdi, chief strategist at Sao Paulo-based brokerage SLW Corretora, who rates Gol as hold. “Those who can fly Gol or Avianca will prefer Avianca” after Gol cut too many flights and amenities such as onboard snacks.

Paring capacity is a common response to bolster profit measures such as unit revenue, or what an airline makes for each seat flown a kilometer.

Unit revenue “has not yet risen sufficiently to get the company back to positive margins,” said Pfennigwerth, who has Gol as equal weight. Third-quarter passenger revenue for each available seat-kilometer rose 3.4 percent from a year earlier, while costs on that basis climbed 9.4 percent, according to Gol, which reported a net loss of 309 million reais ($157 million).

Fuel spending

Spending on fuel accounted for 43 percent of sales based on its most-recent quarterly filing, the fifth-highest total in the Americas, according to data compiled by Bloomberg.

Gol competes in an air-travel market that’s cooling along with Brazil’s economy, whose 0.9 percent expansion in 2012 was one-third of the year-earlier pace. The nation’s domestic passengers increased 6.8 percent in 2012 after 2011’s 16 percent surge, according to Brazil’s aviation regulator.

One bright spot is the pending spinoff of Gol’s Smiles frequent-flier program, which will provide a cash injection, said Matheus Mufarej, a research analyst at Victoire Brasil Investimentos, which holds an undisclosed stake.

Gol surged the most in 16 months on Dec. 26 after signaling it would hold an initial public offering for Smiles. Tam’s Multiplus SA loyalty plan has almost doubled since its 2010 IPO, and now expects to sell more stock to raise 800 million reais.

“The benefit of the IPO is something Gol needs,” Mufarej said.

Finding savings

Kakinoff’s cost savings include a November plan to dismiss 850 workers from the former Webjet Linhas Aereas SA, which then-CEO Oliveira agreed to buy in 2011. Gol’s third-quarter workforce of 18,356 was the smallest since the first three months of 2010, according to data compiled by Bloomberg.

Capacity reductions and the Webjet firings give Victoire a “positive vision” of Gol’s prospects, Mufarej said in an interview in Sao Paulo.

Kakinoff also is having lessors take back 20 aging Boeing Co. 737-300 jets, a model built from 1984 to 1999, in the first half. Gol had an active fleet at the end of the third quarter of 127 737-700s and 737-800s, in addition to the -300s, according to the airline’s website.

“This year, we expect a smoother scenario,” Mufarej said. “Gol is doing everything it can to control costs. We believe in their strategy. They can operate the company well.”

Margin gain?

Gol’s margin on earnings before interest, taxes, depreciation and amortization as a share of revenue probably ended 2012 at 2.3 percent, based on analysts’ estimates compiled by Bloomberg. It was 17.6 percent in 2006.

“It can get back to 15 percent,” Mufarej said. “The question is when.”

Along with capacity and job cuts, Gol should be careful with aircraft management, Evercore’s Pfennigwerth said. Gol said last year it was buying 60 of Boeing’s new 737 Max jets, which have a starting list price of $100.5 million. Deliveries would start in 2018.

“There is also a bit of a disconnect, in our view, between the carrier’s presently low returns, capacity cutting and continued investment in new aircraft,” he said. “It is not entirely clear to us why the company would continue to invest in new aircraft given the currently depressed levels of profitability.”

Editors: Ed Dufner, Cecile Daurat. To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net. To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Jessica Brice at jbrice1@bloomberg.net.

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